Should Conservatives Support the Tax Cut Deal?

There's a growing pushback among conservatives against the tax deal that Republicans negotiated with President Obama, which is scheduled to be voted on next Monday in the Senate. Charles Krauthammer denounced it in today's column, dubbing it "Stimulus II." Erick Erickson has branded it a "TARP baby not worth supporting" and is urging Red State readers to call their Senators to vote "no." And among elected Republicans, Jim DeMint and even John McCain have expressed reservations. So is it as bad as they're saying?

To start with, let me just say that I think Krauthammer's argument is overblown. My major beef is that in equating the tax deal with the February 2009 stimulus package, Krauthammer is accepting the liberal premise that taxes and spending are the same thing. While it's true that from a budgetary standpoint, a reduction in revenue to federal coffers will increase the deficit, just as an increase in spending would, the difference is that a tax cut allows individuals to keep more of their own money, whereas expenditures represent the government confiscating wealth and distributing it as they see fit. Seeing tax cuts as a cost to government is to accept that all income earned belongs to the government in the first place. To the individual who comes home with a fatter paycheck because they're sending less of their hard earned money to Washington, a tax cut isn't a cost, but a savings.

At another point in the column, Krauthammer writes that two-thirds of the price tag of the deal "is above and beyond extension of the Bush tax cuts but includes such urgent national necessities as windmill subsidies." This is highly misleading, as it gives off the impression that most of the deal is just pork-barrel spending. But that's not the case. In reality, an overwhelming majority of the $857 billion* represents tax breaks that are traditionally unobjectionable among conservatives. I've tried to break this down in a graph and pie chart below, but first I want to elaborate on what the various terms mean. And I decided the best way to do that would be to split the provisions into three categories: those that aren't controversial among conservatives, those that are on the borderline, and those that are more controversial. The estimated "cost" of the tax breaks come from the Joint Committee on Taxation and the estimated cost of the unemployment extension comes from the White House.

Noncontroversial: Extending the 2001 and 2003 Bush tax cuts to all income levels would add an estimated $364 billion to deficits, adjusting the Alternative Minimum Tax for inflation so that it doesn't hit millions of Americans would add $137 billion, and the estate tax deal would add $68 billion. While conservatives would prefer more -- making the tax cuts permanent, abolishing the AMT and estate taxes, by in large these provisions have generally been supported by conservatives. The total cost of these noncontroversial provisions is $569 billion, comprising 66 percent of the deal.

Borderline: These are the provisions that many conservatives support, some oppose, but most can live with. These include the payroll tax holiday, which is estimated at $112 billion and the $22 billion expensing provision* that allows larger businesses to deduct 100 percent of the cost of equipment purchases in the first year, and 50 percent in the following year. When you add these to the noncontroversial provisions, that brings us to $703 billion -- meaning that most conservatives could probably live with at least 82 percent of what's in the compromise.

Controversial: These are the provisions that have generated the most criticism among conservative opponents of the deal. One is the unemployment extension, which is $56 billion and represents the only direct spending in the bill. Another $43 billion represents tax credits that were part of Obama's stimulus package -- including one for college expenses, as well as adjustments to the child tax credit and earned income tax credit. But the most controversial element among conservatives is the $55 billion in so-called "tax extenders," (see a list of them here). These are various tax breaks for businesses, including tax credits for ethanol and biodiesel. Earlier today, I spoke with Ryan Ellis of Americans for Tax Reform, and he pushed back against describing these as earmarks, because they allow businesses to keep more of their own money. While it would be ideal to get rid of all the various deductions as part of a broader corporate tax reform that lowered rates from where they are now (40 percent including states, making it the highest in the world), Ellis argues that in the absence of such reform, it's better that some businesses are able to get some form of tax relief.

Bottom line: I definitely have an issue with some of the targeted tax credits to special interest groups and the unemployment insurance extension, which I think should be offset with spending cuts, at a minimum. I think these are ongoing battles worth fighting. But I'm also skeptical that Republicans would have been able to get a better deal with this Congress and this president. I don't want to see taxes go up next month, and I would much rather enter a debate over fundamental tax reform starting from the Bush tax rates as the status quo than I would with higher rates as the status quo.

At the very least, I think that conservative critics of the deal have gone way overboard in attacking the deal as some sort of second coming of the economic stimulus boondoggle. If some conservatives still feel that the unemployment subsidies and tax credits are not worth swallowing, that's one thing. But we should still recognize that an overwhelming majority of the deal is stuff that conservatives have either been actively campaigning for or would be perfectly comfortable with.

Anyway, with that wind up, here's a pie chart I put together breaking down the estimated affect of various provisions on the deal on the deficit.

And here's a (slightly) more detailed breakdown of the deal, with dollar amounts.

*Some people may be confused as to why there's such a discrepancy between the $857 billion cost in the figures I've presented, and the $990 billion figure Krauthammer used in his column. The bulk of the difference is due to how one chooses to consider the cost of the business expensing provision. Because of the way equipment depreciation is accounted for, the ten-year cost is actually much lower than the two-year cost. Here's the breakdown if you prefer the $990 billion estimate, though it doesn't much change the substance of the argument above.

The American Spectator Foundation is the 501(c)(3) organization responsible for publishing The American Spectator magazine and training aspiring journalists who espouse traditional American values. Your contributions are tax deductible to the extent permitted by law. Each donor receives a year-end summary of their giving for tax purposes.